Involuntary Conversions Have Not Changed

Published on: 23:06PM Feb 05, 2018

We recently got this comment on the blog:

Paul, have you addressed the involuntary conversion of personal property under the new tax bill?  Farm equipment can be damaged/stolen and be covered by insurance.  This could become a taxable event if like-kind exchanges of personal property are not allowed.  Thank you.

Section 1031 handles the taxation of tax-deferred exchanges.  It is true under this Code Section that farm equipment is now taxable if you trade it in for a new piece of farm equipment.

However, Section 1033 handles the taxation if property is involuntarily converted such as a fire, accident, etc. and that tax treatment has not changed.  If this happens to your farm operation, you will be granted a period of years to reinvest the proceeds into similar property.  You do not need to use any type of facilitator and can borrow money to purchase the property.

As an example, assume a farmer has an accident with the combine and it is totaled for insurance purposes.  She receives a check from the company for $150,000.  She has at least two years (in many cases more time than this depending on each situation) to reinvest the funds into new farm equipment.  It does not have to be another combine, but simply farm equipment.  She can borrow part or all of the purchase price.  The key is that all of the money is reinvested into replacement property within the required time frame.

Now, with 100% bonus depreciation, it may not matter for federal tax purposes, but will still matter for state income tax purposes.